30-year Treasury yield at 2002 high: term out your debt or wait?

0:05Host:You're listening to MBA Training. Today's subject: 30-year Treasury yield at 2002 high: term out your debt or wait?. Earlier this week the 30-year Treasury yield hit a level nobody under forty has seen in their career. On Thursday it rallied. So was this week a panic, or a sale?

0:22Expert:The market believes both, so start with the facts. Yahoo Finance, citing CNBC, reports that the 10-year yield had touched 5.342% and the 30-year reached 5.683%, their highest marks in 24 years. The trigger was oil. According to Bloomberg, fresh Iranian strikes against shipping in the Strait of Hormuz sent Brent crude above $102 a barrel.

0:50Host:And Thursday?

0:51Expert:Treasury sold $22 billion of 30-year bonds. Reuters reported the auction met with solid demand, showing investors remain willing to buy long-dated government debt. US 30-year yields also declined, down 5.9 bps at 5.602%. A basis point is one hundredth of a percentage point.

1:13Host:So the worst is over.

1:14Expert:I wouldn't say that. A yield that dropped six basis points from a 24-year high is still close to a 24-year high. Investors bought, but they bought at a price your company will also have to pay.

1:26Host:Why should a CFO care about the long bond more than about the Fed? The Fed is what everyone watches.

1:32Expert:The Fed sets the overnight rate. Your ten-year bond is priced off the ten-year Treasury plus your credit spread, which is the extra yield investors want for lending to you instead of the government. This week those two ends of the curve went in different directions. Finimize had the 10-year at 5.364% and the 30-year at 5.696%, while the more Fed-sensitive 2-year sat lower at 4.783%. That pattern is a bear steepener: long rates rise faster than short ones.

2:05Host:Everyone is blaming something called the term premium. Define it and tell me why it matters.

2:10Expert:It's the extra yield investors want for locking money up for thirty years instead of rolling short-term bills. Yahoo Finance cites Bloomberg Economics data showing that as of Tuesday, that measure for 30-year Treasuries had not been this elevated since 2011. It matters because a premium driven by fear of government debt doesn't go away when the Fed changes its mind.

2:33Host:JPMorgan published a note this week that has been passed around a lot. What did it actually say?

2:39Expert:Their strategists tested the usual explanations. According to Investing.com, fed funds rates, inflation and real GDP growth, which explained about a third of yield moves since 1990, failed to explain the rise since 2023, including most of this year's move. Their conclusion is blunt: the U.S. term premium has doubled. The gap between the 30-year yield and the fed funds rate has widened to 1.42% from 0.73%, a level seen before only after the Fed funds rate fell more than 70%. They identify the main pressure as the government's financial health, with debt-to-GDP at record levels.

3:23Host:That's a bank with a view to sell. Who disagrees?

3:26Expert:Bank of America's rates strategist Ralf Preusser, quoted by Yahoo Finance, said "The bond bear market since the start of the year is primarily a story of central bank repricing". In plain English: the market expects the Fed to keep rates higher for longer, and long yields are adjusting to that. Both are serious shops. My own view is that the bear steepener supports JPMorgan. If the Fed were the whole story, the two-year would lead the move, and this week it didn't. That's an opinion, and I hold it loosely.

3:58Host:Pimco's Dan Ivascyn told the Financial Times the ten-year could hit 6%. Is that a forecast or a headline?

4:05Expert:It's a scenario. According to Reuters, he said a sharp rise from 5.29% was "feasible" in the near term, citing hedge funds unwinding losing positions. Reuters also notes the 10-year yield has risen almost 120 basis points this year. Ivascyn put part of the recent selling down to stop-outs, which are forced exits when losses hit a preset limit. In his words, "some stop-out activity from the platform hedge funds and other levered investors."

4:36Host:And the number that should worry me?

4:39Expert:5.5%. He said a move to 5.5% or higher would likely lead to "some decent weakness in risk markets, both credit and equity". That's a line to write on your whiteboard.

4:51Host:Here's the uncomfortable one. Plenty of finance teams stayed short or kept floating-rate debt, betting that rates would fall. Did they get it wrong?

4:59Expert:If the bet was on rate cuts, the market has gone the other way so far. But on today's curve, short money is still cheaper than long money: a two-year Treasury at about 4.8% versus a thirty-year near 5.7%, using the Finimize figures. Staying short keeps your interest bill lower today. The cost is exposure if short rates rise from here. Neither choice is free. Being short is not the mistake. The mistake is being short without a plan for refinancing.

5:30Host:So do I issue now or wait?

5:32Expert:That depends on your maturity wall, meaning how much debt comes due and when, and on whether you can afford to wait. Two practical points. The first is supply. Finimize describes it as a clearing-price issue: there's only so much balance sheet and demand for long-duration bonds when Treasury auctions and large corporate deals come to market at the same time. You are competing with the US government for the same buyers. The second is how fragile Thursday's window was. Crude pulled back slightly after President Donald Trump said that the US will not launch an attack on Iran before midterm elections in November. That's a political statement with a date attached, and it doesn't change the fundamentals.

6:15Host:What about the equity side? My board asks about cost of equity, not coupons.

6:20Expert:Your cost of equity starts from the risk-free rate, so it moves with these yields. JPMorgan makes the point sharply for smaller companies. According to Investing.com, the share of U.S. small- and mid-cap stocks with a dividend yield above the 30-year Treasury yield has dropped to 9% from 19% since the start of 2024, a 24-year low. If your story to shareholders is income, the government now pays more than nine in ten of your peers.

6:50Host:Is this only an American problem?

6:52Expert:No. Yahoo Finance reports that U.K. 30-year gilt yields returned to 6% and comparable French yields rose by as much as 14 basis points. If you fund in sterling or euros, you can't escape it by switching currencies.

7:07Host:Give me the strongest case that I'm overreacting.

7:10Expert:Here it is. Buyers showed up on Thursday at these levels. Mizuho's Evelyne Gomez-Liechti told Bloomberg that "the market remains caught between attractive outright yield levels and an oil story that refuses to fade." Part of the selling was forced hedge fund exits, and that kind of pressure can reverse quickly. If oil drops back below $100, a good share of the premium could come out. That's a fair argument. I still wouldn't build a funding plan that depends on it.

7:40Host:One thing to do this week.

7:41Expert:Take every debt maturity over the next 24 months and reprice it at a ten-year Treasury of 6% plus your current spread. That's Ivascyn's scenario. Then check the result against your interest coverage covenant, the minimum ratio of earnings to interest your lenders require. If it breaks the covenant or puts your rating at risk, write the pre-funding memo now while the auctions are still drawing buyers. And watch the ten-year against 5.5% every morning this week.

8:11Host:Drawn from Yahoo Finance, Finimize and Investing.com, links in the show notes. That's all. For an honest read on your level, the CFO assessment is at mba-training.com.